Study of consumers' psychological response to promotion based on mental accounting principles

Abstract

As industry expenditure on sales promotion has grown, an increasing amount of academic research has focused on the impact of promotions on consumer behavior. The substantial body of literature on promotions is composed of two broad streams of research. The first stream of research is concerned with the effects of price promotion on a range of single product outcomes e.g. sales, brand switching, price perception and product quality. Although research on retail price promotions has suggested that promotions have a positive cross product impact (i.e. lead to increase in sales of regular priced products during a promotion), studies have not examined the impact of promotions from a multi-product perspective. The second stream of research is concerned with design of price promotions in terms of analyzing consumer response to different levels and presentations of price discounts. Although non-price promotions such as free gift offers and extra product offers have been increasingly popular in recent years, studies have not examined design issues related to such promotions. The objective of the present study is two fold. First, it examines the psychological processes that lead to a positive cross product impact of a promotion. Second, the study examines promotion designs in the context of both price and non price promotions. The research issues are examined based on two principles of mental accounting theory — (i) grouping and labeling of resources and (ii) segregation of gains. Based on the grouping and labeling of resources principle, the study examines if a promotion is labeled as a gain in the consumer’s mind and increases propensity to spend on regular priced products. It next examines if the propensity to spend promotional savings is for the same mental category of products as the promoted product or a different mental category of products. Based on the principle of segregation of gains, the study examines consumer preference for segregated versus integrated designs of price and non-price promotions. Hypotheses of the study were tested through experiments that involved exposing subjects to a variety of promotions and target purchases. Manipulation checks for the experimental stimuli were done through a series of pretests. Finally, eight experiments covering a total sample of 400 subjects were conducted. Experimental results show that subjects have a higher propensity to spend from savings of a price promotion rather than from an ‘income effect.’ However, this result is not found for a free gift promotion. The propensity to spend promotional savings is higher for the same mental category of products as the promoted product rather than a different mental category of products. Results also demonstrate strong evidence in support of segregation of promotional gains. Subjects prefer segregated rather than integrated versions of three different types of promotion -price off promotion, extra product promotion and free gift promotion. Issues addressed in this research have direct relevance to managers who are planning sales promotions. Understanding of the cross product impact of promotions can allow managers to increase sale of regular priced products during a promotion. Insights into segregation of promotional gains can enable managers to design a promotion of a given monetary value in a way that maximizes consumer perception of value.